The Myth of 100% Profits

There’s a common belief online that selling downloadable products means that your profit margins are 100%. Today I will debunk that myth.

I’m sure this idea comes from the fact that there is no inventory to buy or make, no storage space needed, no packing materials or shipping costs involved, and so on.

But let’s look at the other costs involved.

Unless all your customers are sending you checks or cash in the mail, you’ll have to use a payment processor to take credit card orders, and they will charge a fee.

If you have affiliates or JV partners, about half your retail price is gone right there. (And if you don’t, you are probably missing a lot of sales you could be making.)

So you make all your sales on your own? Are you paying for advertising, such as PPC or ezine ads?

Oh, you’re just relying on free search engine traffic? Did you spend any money to achieve that- maybe by buying links, hiring a freelancer to run a linking campaign or write articles for you, using an SEO company (*cough*), or maybe paying someone $800 a month to teach you?

If not, then you probably put a lot of time into getting and maintaining high enough rankings to get that free traffic.

Maybe you are just marketing to your own lists… if so, you are missing a lot of potential customers. And didn’t you invest some money and/or time into building those lists?

If you’re making 100% profits I assume you are using free hosting, free autoresponders, and so on. You’re either doing all the work yourself or found someone who will work for free, and apparently you (or they) don’t assign any monetary value to time.

You’re probably also running an illegal business if you aren’t spending any money on licenses or taxes.

Let’s look at an example with real (rounded) numbers. A $40 ebook is sold. The payment processor, such as Clickbank, PayPal, 2checkout, or your merchant account, takes $2-4 of that.

Oops, did I call 2checkout a payment processor? How silly of me! It is actually “an authorized retailer of goods and services provided by a vendor”. Even though the only reason you as a marketer would use its services is to process your payments.

And Tony Soprano is in the waste management business.

If an affiliate was involved, there’s another $15-20.

Now we’re down to $16-23 on a $40 sale, without considering any overhead or product development costs or taxes.

Oh, some of my products involve a partner who gets half of the “net”, so on this $40 sale, I’m down to as little as $8 for me on a $40 sale. That’s 20%, quite a bit less than that 100% the others are claiming.

If I used PayPal (cheaper fees), there was no affiliate, and I used a really good PPC ad, I might have $30 out of the $40 left. That’s 75%, before splitting with a partner.

So what’s my point? I’m not here today to demonstrate my math skills, but I have some key things to point out that you should recognize:

1. You (and other people) are not making as much as you think you are. In other words, don’t confuse your sales (gross) with your income (net). I make a lot of sales through PayPal, so when I see $300 or $500 or whatever come in, it’s easy to think I made that much. But I still have to pay for advertising and affiliate commissions and a bunch of other things from that.

It can be tough to tell exactly what you’re really making (i.e., your “take home pay”, what you can actually spend outside of business).

2. Your profit per sale is less than your customer thinks it is, and you should ask yourself how much of your time people are entitled to when they buy a low-priced product. To them, they spent $40 and downloaded the product, so they think you made $40 profit. So some customers think nothing of expecting you to provide hours of free consulting, answering unlimited questions about whatever subject your product covers.

I’m not talking about basic support issues, like people who had downloading problems or lost login info or things like that.

I’m talking about people who buy an ebook on something like weightlifting, and then expect you to set up a customized workout plan just for them, for free.

(Of course, I’m assuming your website doesn’t promise this type of personalized service. If it does, you need to deliver.)

I’ve found that the more questions like this someone asks, the more likely they are to ask for a refund after using all your personal time. It’s sad but true- you might spend several hours over a month answering a dozen questions for someone (most of which are covered in your product), and the thanks you get is having to give back the money. You just went from making Wal-Mart wages to zero.

There’s something about the Internet that raises people’s expectations. In the offline world, nobody would expect this type of free consulting. If you bought a Donald Trump hardcover book, would you think that entitles you to spend an hour or 2 on the phone with him? Or have him personally answer your email questions? Of course not.

Maybe you think Trump is a clown, but you still have to agree it’s pretty silly to expect some of his personal time to be included with your low-priced purchase.

You need to decide how much of your time you’re willing to give in exchange for that $15 or $20 you just netted. Should you have to spend 3 or 4 hours answering questions? I don’t think so, unless you have some back-end consulting program and are providing some free help to get clients into it.

Or maybe you are doing this to get testimonials for a new product, or compiling people’s questions and your answers for a followup product. Those are good ideas.

I know some people will misread this, and say I’m telling you to ignore your customers, not help them, and so on. That’s not the case at all.

I’m not saying don’t answer questions, just keep in mind what you are really making per sale and what your time is worth.

Say you made 10 sales of this product per day that netted you $200. If each customer expected an hour of your time, there’s 10 hours a day right there. When are you going to get your other work done?

Remember, the whole point of selling downloadable products like ebooks is supposed to be that, once the product is created and set up on a site, the sales and delivery is automated so that you can focus on marketing and creating other products.

So why put yourself in a position where you have to all this after-the-sale pro bono consulting?

Even if you love doing it, what happens when you start selling 50 or 100 per day?